Seven: The Private Welfare State and the End of Paternalism
In America a cast system of work-related benefits
complements the social welfare delivered by public authorities, private
charities, and social services. Largely a product of the years since
World War II, the private welfare state has given many American workers
and their families unprecedented security during illness and old age.
Always a privilege, never a right, the benefits of the private welfare
state have proved more fragile and, even, reversible than many had
supposed. Just as welfare reform was an attempt to increase individual
responsibility by reducing dependence on the state, the emerging
benefits strategy has pushed workers toward greater self-reliance by
weaning them from dependence on employers.
Origins of the Private Welfare State
Employers hoped pensions would reduce labour turnover,
which was extraordinarily high, and prune older and less productive
employees from the workforce.
In 1929 fewer than 4% of men employed in industry and
fewer than 3% of women had worked long enough at a single firm to
qualify. The benefits themselves remained insecure, subject to
reduction or elimination and unprotected from inflation.
Pensions spread more quickly in the public sector as
city governments tried to clear urban workforces of older, allegedly
incompetent members. The national government, for its part, promoted
the spread of pensions with tax incentives.
With fears of radicalism enhanced after World War 1,
the introduction of welfare measures into work accelerated during the
1920s, and welfare capitalism shifted away from social, educational,
and athletic programs and toward programs with financial incentives,
such as insurance and pensions, that male bread winners "earned". In
the process, men replaced women as the majority of the beneficiaries of
Workers responded to welfare capitalism with
ambivalence. Organized labor in the 1920s clearly loathed private
welfare work, which it correctly perceived to be in large part an
effort to win workers loyalty away from unions.
Although the Depression appeared to kill welfare
capitalism, it "did not die, but instead went underground - out of the
public eye and beyond academic scrutiny - where it would reshape
itself". With company unions outlawed, collective bargaining required
by public policy, and the rudiments of a federal welfare state in
place, welfare capitalism reconstituted itself as a system of employee
benefits that supplemented Social Security. By the late 1940s,
America's distinctive public/private welfare state had emerged, now
supported by organized labor and large employers.
The number of firms offering pensions and health or
accident insurance climbed surprisingly in the early years of the
Depression and then multiplied by the mid-1940s. One reason lay in the
remarkable fiscal stability of the insurance industry, which managed to
honor its pension liabilities even during the Depression.
The reorganization of the pension industry... firms
sponsoring pensions turned away from the large insurance companies that
had dominated the industry. Looking for lower costs and greater
flexibility, they began to insure their own risks and to make their own
design and investment decisions. In the process, they turned
increasingly to new firms that offered professional benefits
management. The results left pension funds financially vulnerable -
insufficiently funded, tied to the prosperity and persistence of
individual firms, and open to abuse, manipulation, and, sometimes,
In the 1950s and 1960s, federal officials would have
accepted a trade-off: lower private pensions for higher Social
Security. Unions, however, balked at this alternative and cut their own
deals with business for higher pensions. Organized labor's determined
pursuit of the mixed-benefit strategy made it impossible to mount an
effort to win universal public benefits or redistributed taxes. The
creation of a private welfare state divided "the American working class
into a unionized segment, which until recently enjoyed an almost West
European level of social welfare protection, and a growing group -
predominately young, minority, and female - who were left out in the
The private welfare state not only dampened organized
labor's drive for expanded public benefits and divided the working
class; it fueled blue-collar resentment toward people supported by
state welfare or public assistance.
For nearly four decades the private welfare state
provided a majority of American workers and their families with
unprecedented security undreamed of by earlier generations. Few
understood its foundation in employer self-interest rather than worker
entitlement or foresaw its fragility - or how evanescent the moment of
security would seem.
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The Scale of the Private Welfare State
The private welfare state is vast. The sheer size of
the private welfare state has transformed worker compensation and
economic security in the years since W.W.II. Although, American workers
have always financed a large share of their own security, the balance
shifted between 1960 and 1980. In the 1960s, individual workers
contributed more to their benefits than employers did; by 1980 the
situation had reversed, and employers contributed by far the largest
share. As a percentage of total compensation, employee benefits grew
from 8% in 1960 to 18% in 1993.
As a result of massive infusions of money into
retirement accounts, pension funds have an enormous influence on the
national economy. According to one estimate, pension plans hold about
one-quarter of retired wealth. About 3/4s of this wealth remains in
private pension plans, with the rest held by plans in the public sector.
In the United States, employee benefits emerge from a
partnership among businesses, government, and individuals and is highly
regulated by government. The major legislation shaping the framework
for private pensions is the 1974 Employment Retirement
Income Security Act (ERISA).
The federal government heavily subsidizes retirement,
health care, and economic security. Despite the web of regulations
surrounding it, the private welfare state remains decentralized,
complex, and sometimes chaotic. No central structure of regulations
governs benefits; instead, regulators respond to problems on a
piece-meal basis. A new benefits industry of experts, counselors, and
consultants has emerged "to lobby and interfere with government
regulators and lawmakers".
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Trends in the Private Welfare
Historically, progressive employers practiced welfare
capitalism to increase worker loyalty and decrease labor turnover.
Pensions were not very portable; layoffs put them at risk. They were
designed for employers who wanted to hold the same workers for many
years and for employees who built long-term careers with the same
firms. This system made less sense in the new global economy. In a
ironic twist of history, many employers now looked to benefits to
facilitate short-term employment.
The design of benefit plans also responded to
corporate culture. Organizations with network cultures - "highly
flexible, innovative, and transitory" companies that partnered with
other firms for specific purposes - offered the least and most flexible
benefits and oriented them to the short-term, consistent with the
short-term focus of each venture.
Forces reshaping the national and world economy joined
with demographic trends to drive changes in the private welfare state.
Part-time employment, which frequently offered no
benefits, also increased about 10% from 1973 to 1995. Union membership,
the best guarantee of benefits, declined from about 30% of the
workforce in 1950 to just under 25% in 1973 and 14.5% in 1996.
Where workers once had bargained over wages and
improved benefits, in the 1980s and 1990s they increasingly negotiated
over the rollback of the private welfare state - concessions in wages,
benefits, and work rules. With unions weak, many employers took
advantage of their freedom to redesign pensions and health care
benefits at will. "Welcome to the increasingly Darwinian world of
reduced expectations." I am less than optimistic that most baby boomers
will retire in relative financial comfort given the substitution of
relatively less generous pension plans, reduced job tenure, increasing
life expectancy, and high retiree medical and long-term care costs."
By the mid-1990s, unions had begun to shift their
primary interest from wages and health benefits - the key issues of the
previous decade - to pensions.
Between 1965 and 1985, the proportion of men from ages
55-64 in the labor force plummeted from 85% to 66%. With these trends,
retirement benefits loomed as an increasingly sensitive and important
issue for both the private and public welfare states.
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The End of Paternalism
The world of work is changing, employers are schooling
employees in the end of paternalism and an end to the entitlement
mentality. This pattern will not reverse.
As they constructed smaller, more flexible workforces,
employers redesigned benefits to suit mobile workers likely
to change jobs several times during the course of their careers. To
save money and enforce individual responsibility, they also shifted
some of the costs of benefits to workers.
The shift from defined benefit to defined contribution
pensions reflected these changes. Employers emphasized controlling
costs and "maintaining 'flexibility' in managing their workforces."
Defined contribution plans met these objectives better than did defined
benefit plans, with their "associated entitlement fostering mentality."
Defined benefit plans, moreover, proved "dysfunctional" because as
employees' salaries rose, their value to the company declined after
long years of service. Defined contributions also suited "corporate
mergers, acquisitions, and divestitures" better than did conventional
pensions. In theory, defined contribution plans benefit both employers
and workers. They release employers from managing and funding their own
pension plans, and they increase the portability of pensions for
workers who change jobs. Unions, objecting to cost-shifting onto
employees and worried about the potential hardship from poor investment
decisions, vigorously oppose defined contribution plans. Employees
often prefer defined benefit plans because they guarantee a check for
Defined contribution plans have subjected workers to
the uncertainties of the market from which pensions had been designed
in part to shield them. Like any market based strategy, defined
contribution plans have shifted both the potential risks and rewards.
Employers have shifted the cost of health care as well
as pensions to their employees. In only a few years, employers have
accelerated the movement of Americans into managed care (PPOs - which
consist of networks of physicians, rather than in conventional HMOs
(Health Maintenance Organizations)), which employ their own staffs.
Retired workers over the age of 65 also faced Medicare
premiums with less help from their former employers. Former employees
were retiring earlier and living longer, and insurance companies were
Increasingly, employers swept away the remaining
vestiges of paternalism by outsourcing the administration of employee
benefits and corporate "human relations". Many employers looked
"outside the company to consultant insurance companies and mutual funds
for assistance in administrating benefits".
Outsourcing proved attractive because it promised to
both redefine relations between employers and employees and reduce
costs and administrative headaches. Outsourcing allowed companies to
concentrate on their "core business" and to speed up shifts in employee
benefit design and administration to match the accelerating pace of
Outsourcing constricts the relation between employer
and employee to narrow interactions around jobs; it reduces the
dependence inherent in paternalism and devolves responsibility to
outside specialists; and it redesigns the administration of employee
benefits and human resources on a market model.
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The End of Paternalism in Action
Historically, companies had "done too much of the
planning" for its employees. Now it provided "flexible benefits with a
financial planning program as an option for employees." As in any
market-based transaction, risk had entered the new employment
relation. "We see the new employment relationship like a river. The
organization is dynamic, not static, with some people thriving on the
fast pace, some keeping up with the flow, and some not able to keep up
and being left behind. There is stability within the entity, but it is
not stagnant; it is dynamic."
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Paternalism reinforced the idea that benefits were
entitlements, undermined individual initiative and responsibility, and
drove costs to unacceptable levels. Governors, by time-limiting
welfare, and corporate leaders, by redesigning benefits, proposed to
force individuals to take charge of their lives - which meant treating
them as adults, not children, and binding them with mutual obligations.
New obligations reflected a market model: state governments and
businesses tried to narrow the scope of their relationships with
clients or employees by outsourcing the administration of benefits;
wherever possible they turned to managed care or internal competition
to increase efficiency and cut costs.
Governors had seized the initiative in welfare reform
and used waivers of federal law to redesign state public assistance.
Employers had cut back the employee benefits that had expanded in the
years after W.W.II and remodeled those that remained. They also had
undertaken the vigorous reeducation of American workers to depend more
on themselves and the market than on the paternalism of their
employers. The end of paternalism helped employers design flexible new
strategies for competition in the global marketplace; it also left
employees increasingly vulnerable to the insecurities of unemployment,
sickness, and old age.
Just as welfare reform was an attempt to increase
individual responsibility by reducing dependence on the state, the
emerging benefits strategy has pushed workers toward greater
self-reliance by weaning them from dependence on employers. Employers
had cut back the employee benefits that had expanded in the years after
W.W.II and remodeled those that remained. The end of paternalism helped
employers design flexible new strategies for competition in the global
marketplace; it also left employees increasingly vulnerable to the
insecurities of unemployment, sickness, and old age.
to Table of Contents/ . . .